This week's eSourcing Wiki-Wednesday topic is Selecting Categories for Outsourcing. An excerpt of the article is below, but you can also read the full article on the eSourcing Wiki. Have something to add? The eSourcing Wiki is an open content community and you are invited to register and contribute to this resource, which benefits our whole professional community.
If you are interested in more, read today's post on 'The Point': How to Choose
Selecting Categories for Outsourcing
Procurement outsourcing normally generates the largest returns when applied to non-strategic indirect categories and direct commodities of limited strategic value. In addition, it generates the largest return when the PSP has enough volume to identify significant savings opportunities. Therefore, it is important to select a PSP that will allow the organization to go beyond simple infrastructure transfer and process support. (However, the organization should still be cautious and not to go too far with the outsourcing initiative, since strategic sourcing dictates that strategic categories are managed carefully.)
Indirect purchases are ideal for procurement outsourcing because they are typically transaction driven, not part of the core business, and so varied that they generate considerable process inefficiencies for purchasing staff, especially when most information systems are designed for direct material categories. Furthermore, due to the sheer number of categories and variations therein, many buyers will lack the time and means to apply best practices such as cost breakdowns and benchmarking to these categories. Thus, a PSP with the right skill sets could be invaluable.
Established Procurement Service Providers focused on sourcing are usually market leaders that have a number of inherent advantages which include a larger supply base, higher levels of expertise in niche categories, and the ability to aggregate spend on a larger scale. In addition, they can often tap more economical labor sources in regional markets and implement new sourcing processes and technologies more efficiently.
A PSP reduces the headcount an organization needs to perform certain manual and tactical processes or to manage certain indirect or non-strategic categories that are not a core competence, freeing up the procurement team to spend a much greater percentage of their time on strategic activities and strategic categories and generate a larger return on organizational investment.
Remember, the overall value creation offered by a PSP comes from the combination of expertise, technology, and process and not from headcount reduction, cycle time improvements, or simply technology enablement. Results come when the organization chooses a PSP that fits within the organization, complements the business model and supply chain strategy, has expertise in those categories where there is insufficient in-house expertise, and where the PSP is able to take on basic functions that free up the organization’s top talent to work on strategic categories where they can have the greatest impact.
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